Why are Companies unable to enjoy the ripe fruits of
Mergers & Acquisitions


Karna Jalan
1st Semester
ICFAI Business School


Like the process by which a child learns to walk, most business innovations emerge from dozens of trial and error experiments, from seemingly random actions that eventually form a pattern; from hundreds of small, almost imperceptible adjustments that eventually result in a solid state forward. This has been true for development ranging from lean manufacturing to concurrent product development to business process re-engineering all now well accepted innovations that emerge from dozens of experiments until they crystallized to form a methodology others could follow.

An exception to this rule thus far has been innovation relating to acquisition integration the process by which one company melds with another after the deal is done. Most acquisitions and mergers are one time events that companies manage with heroic effort; few companies go through the process often enough to develop a pattern. Thus it tends to be seen not as a process as something replicable but only as something to get finished, so everyone can get back to business.

No one knows for sure where we're all going to end up. But we know that we need to get there quickly. We need to carve out our space. And the only way to do that is through acquisitions. The plain fact is that acquiring is much faster than building. And speed- speed to market, speed to positioning, speed to becoming a viable company- is absolutely essential in the new economy. Acquisitions are certainly very good way to add a product line or distribution channel that would be too costly to build from scratch. The need for speed forces companies to acquire rather than build.

Cultural Conflict prevents the companies to reap the benefits of M&A

Cultural issues are equal to financial factors in making a deal successful. M&As are conflict-prone situations that bring the risk that even seemingly small cultural differences can take on enormous significance. All too often, cultural conflicts cause mergers & acquisitions to end in failure - expensive failures that are not just financial, but that do major damage to their corporate image and cause loss of momentum and positioning in the global marketplace.

Mergers & acquisitions bring together significant cultural differences in the way companies and people do business and work together - differences in management styles, communication styles, organizational structure, planning, decision-making, how teams work together and more. Each of these areas is potential hotbeds for cultural misunderstanding, resentment and coordination breakdown. Let us consider this recent example:

  • Daimler Benz (Germany) and Chrysler (USA) merged to form DaimlerChrysler... Twelve top executives of Chrysler ended up resigning because of conflicts over management styles and decision making process.

Let us see how cultural conflict results in failure of mergers and acquisitions:

  • Corporate culture conflicts and CEO personality clashes are key reasons for the unmet expectations or outright failure of mergers and acquisitions, according to a Conference Board study released recently.
  • A key problem is that many company leaders focus almost exclusively on the financial and legal aspects of mergers and that once deals are done; senior management turns its attentions elsewhere. Too few top executives deal systematically with cultural issues that can trigger widespread employee stress and declining productivity. Human resources departments, generally understaffed for the intensive activity of a merger, are often brought in too late to be effective.
  • Culture conflicts are especially strong when small, entrepreneurial firms are acquired by large, hierarchical companies with numerous rules and regulations and when acquiring companies try to centralize business units that have operated independently before the merger.
  • The norms, beliefs and values of the two organizations are key cultural issues that must be examined. For example, an organization may value making money and believe that too great an emphasis on high-quality care leads to poor financial results. This entity will have a difficult time merging with or being acquired by an organization that values quality service and believes that financial results follow high-quality care and service.
  • Failure to focus on governance, leadership, and cultural issues before a merger or acquisition is consummated guarantees that serious problems will occur during the implementation phase of the arrangement. This failure ultimately causes the entire merger or acquisition to fail.
  • At the beginning of negotiations, we tend to concentrate more on the business portfolio, but as the deal advances, our focus switches to people and processes and once the deal closes you often have to move very quickly on those fronts. The very first thing we have to do is settle the uncertainty of whose going to report to whom and who is responsible for what. Doing that helps people to focus externally rather than internally. Losing external focus is one of the biggest risks when we integrate two businesses and that's when we loose people and customers.
  • Reluctant to delegate too much authority to younger people.

Governance of the new organization must be discussed openly and negotiated in the same way that financial issues are resolved. Before agreeing to the deal, we need to decide which board of directors and which directors will survive the transaction. When religious-sponsored institutions merge or acquire community institutions, the issue of governance is of critical importance.

Leadership for the new organization must also be determined before the merger or acquisition is completed. Delaying this issue usually results in power struggles among executives and management staffs. Addressing the leadership questions before a merger or acquisition is difficult because it is almost impossible for the two parties negotiating the transaction to be objective on this issue. Self-interest usually prevails over logic or common sense. This is where the boards of the two parties have to step in and provide strong leadership. Also, it may be helpful to bring in an outside consultant to aid in this process.

Some other reasons for the failure of Mergers & Acquisitions

Studies have documented that anywhere from 50 percent to 80 percent of all mergers and acquisitions fail. This is because we undermine 98% of the business for 2% opportunity. On the basis of various studies it has been outlined that seven primary reasons most of which overlap due to one leading to the other or exacerbating one or more of the others are responsible for the failure of mergers and acquisitions.

1. Premium Too High - Particularly in hostile takeovers, the acquirer may pay too high a premium. While the shareholders of the acquired company, particularly if they receive cash, do well, the continuing shareholders are burdened with overpriced assets, which dilute future earnings. This will come into sharp focus next year as companies are forced by the new merger accounting rules to revalue and write off goodwill booked in prior-year acquisitions.

2. Poor Business Fit - The conglomerate acquisitions of the '60s are the most cogent examples, but the lessons seem to be forgotten periodically. Technology acquisitions where the architectures did not fit are a 1990s example, such as the rush by some companies to acquire Internet firms or other new era businesses they did not understand.

3. Management's Failure to Integrate - Often the acquirer's concern with respect to preserving the culture of the acquired company results in a failure to integrate, with the acquired company continuing to operate as before and many of the expected synergies not being achieved. A well-conceived plan for business integration, without disruptive culture clash, is the single most important element of a successful merger.

4. Overleverage - Cash acquisitions frequently result in the acquirer assuming too much debt. Future interest costs consume too great a portion of the acquired company's earnings. An even more serious problem results when the acquirer resorts to cheaper short- term financing and then has difficulty refunding on a long-term basis. A well-thoughtout capital structure is critical for a successful merger.

5. Boardroom Schisms - When mergers are structured with 50/50 board representation or substantial representation from the acquiree, care must be taken to determine the compatibility of the directors following the merger. A failure to focus on this aspect of the merger can create or exacerbate a culture clash and retard or prevent integration. All too often, the continuing directors fail to meet and exchange views until after the merger is consummated.

6. Regulatory Delay - The announcement of a merger is a dislocating event for the employees and other constituents of one or both companies. It is customary to have detailed plans to deal with potential problems immediately following an announcement. However, when there is the possibility of regulatory delay, the risk of substantial deterioration of the business increases as time goes on, with valuable employees and customer and supplier relationships being lost. This loss is a key consideration in evaluating whether a particular merger should be undertaken. It is necessary to include in this evaluation the relationship between the desire to limit antitrust divestitures and the costs attributable to the delay in consummating the merger.

Karna Jalan
1st Semester
ICFAI Business School

Source: E-mail November 4, 2006




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